Contract Farming Offers Fresh Hope for Africa's

Contract farming offers fresh hope for Africa’s declining agriculture

Agriculture contributes signiﬁ cantly to Africa’s Contract farming arrangements can also ﬁ ll economy. However, despite its immense potential in the void left by governments in the wake of to boost economic growth and cut poverty, liberalisation by providing access to inputs, agriculture has continued to perform dismally. technologies, credit and other services.

Since the late 1980s, the continent has been Due to its immense potential, contract losing out on the international markets. To date farming has been given a central role in the its share of world agricultural trade has declined latest strategy by the Partnership for Africa’s for nine out of ten major exports, partly due Development (NEPAD) to revive the continent’s to unfavourable trade rules that limit farmers’ agriculture. access to markets. This policy brief presents an overview of contract farming in Africa, highlighting the key issues and Contract farming has the potential to link farmers challenges. to markets and stimulate agricultural production in the face of globalisation.

04 East Africa Policy Brief. No 2 2 strategy NEW STRATEGY TO REVAMP AGRICULTURE African leaders recognise that agriculture is crucial to the continent’s economy and overall development. To revitalise this key sector, the continent’s leaders came up with the Comprehensive Africa Agriculture Development Programme (CAADP), a new framework to reduce food insecurity and poverty on the continent.

Initiated under the New Partnership for Africa’s Development (NEPAD), CAADP seeks to achieve its objectives through four pillars: sustainable land and water management,

improvement of rural infrastructure and enhanced market access,

increasing food availability and nutrition, and

improving agricultural research and technology dissemination and adoption.

In line with the Millennium Development Goals of halving poverty and hunger by 2015, NEPAD expects the new plan will push Africa’s agriculture to grow at six per cent a year.

CONTRACT FARMING KEY TO REVIVAL PLAN

Embedded in CAADP’s priority investments is contract farming, a business model that links production to markets by enabling smallholder farmers to practise high-value agriculture and reach markets at all levels — national, regional and international.

AT A GLANCE…

Contract farming (CF) may have different de nitions Future opportunities will be in staple foods. By 2020, and motivations, but basically, it commits the farmer to Africa’s demand for staples such as maize, cassava, rice, produce and supply a speci ed agricultural product and the sorghum, beans is expected to rise as its population entrepreneur to buy at an agreed price. This relationship reaches 1.26 billion. This will create a big opportunity for thrives where there are incentives and ways to monitor and contract farming, especially as half the people will be in enforce agreements. towns and unable to grow their own food.

CF arrangements are more signi cant with high-value Smallholder farmers are scattered across farmlands, crops and animal products. For instance, 88 per cent of keeping the cost of CF transactions high. However, this poultry reared and 96 per cent of sugar cultivated in the can be reduced through effective farmer organisations USA are sold under contract farming. In Zambia, all the that enhance business skills and the bargaining power of cotton is grown by contracted farmers. farmers. Interventions by governments, for instance by improving infrastructure, would also help. In many parts of Africa, contract farming has proved effective in integrating smallholder farmers into commercial Although it has obvious bene ts for smallholders, CF is agriculture. For instance, in Mozambique, most of the not a solution for every market development challenge. more than 400,000 producers that bene t from CF are Poor infrastructure, weak contract enforcement, limited smallholders with less than one hectare of land. These markets for nancial services and political interference in producers pool resources and their farm produce to cut product and input markets undermine the viability of CF production costs and reduce marketing risks. Collectively, arrangements. they nd it easier to get inputs, credit, technical advice and services such as processing and transport.

2 Contract farming’s potential in linking smallholder farmers to markets success Contract farming in selected countries USA (2001): Sugar (96%), fruits (59%), cotton (52%), poultry (88%), pork (61%) Brazil (2004): Poultry (70%), pork (40%), soybean (35%) Mozambique (2002): Cotton (100%), tobacco (100%) Zambia (2006): Cotton (100%), tobacco (100%), paprika (100%)

NEGATIVE EFFECTS CONTRACT FARMING As CF gains ground in Africa, it is imperative that all stake- SUCCESSES IN AFRICA holders know its inherent undesirable effects: CF leads to inequitable distribution of bene ts and risks All the cotton and tobacco produced in between landowners and tenants, agribusinesses and Mozambique is done through Contract Farming. farmers, and men and women. It also tends to leave out In Zambia, 100 per cent of paprika, tobacco and the poorest, particularly those who do not have enough cotton are produced through the system. land to enter into contracts. In Kenya, contracted farmers produce 60 per cent of tea and sugar, and all the country’s tobacco. Contract farming can undermine food security.

In these countries and elsewhere on the continent, contract farming is used to integrate smallholder farmers into commercial agriculture. The business model links them to markets and enables them to share production and marketing risks with promoters.

Contract farming has also given smallholder farmers new opportunities to earn income. For example, farmers have been able to enter into markets for high-value horticultural crops that require a high investment. Farmers have also bene ted through: WHY CONTRACT FARMING • Guaranteed markets (Malawi)

• Access to affordable credit in rural areas HAS NOT WORKED WELL (Malawi and Mozambique) 1. Promoters bear high transaction costs because of poor infrastructure and dealing with individual farmers scat- • Higher prices tered over large areas. • Training in management 2: Farmer organisations are weak. Most lack managerial, Lack of information -- indicating weak monitoring leadership and production skills. and evaluatioin systems in many parts of Africa 3: International trade agreements put up barriers to trade -- makes it dif cult to determine the success of and deny agricultural products from Africa fair access to current CF arrangements in improving agriculture world markets. and people’s lives. Nevertheless, an analysis of the impact of incomes in Kenya’s horticultural industry 4: High production risks due to crop failure, resulting in reveals that Contract Farming has enabled farmers insuf cient volumes, or products that do not meet the to raise their incomes more than their counterparts standards. outside CF arrangements. Adoption of CF has 5: Inability among farmers to predict prices or factor in un- also created more jobs, especially for urban poor favourable exchange rates and other marketing risks. This women, both on farms level and in cleaning and sometimes leads to buyers ending contracts prematurely. packaging. 6: Promoters who take advantage of farmers’ weak bargaining position to exploit them.

Contract farming’s potential in linking smallholder farmers to markets 3 4 improve

WHAT CAN BE DONE TO IMPROVE CF IN AFRICA

Often contract farming operates under outdated policies and They should give farmers the right inputs and training. laws. Governments should revise to align them to present-day Frequent interaction and sharing of information on costs and realities. market prices will build mutual trust between farmers and Lack of harmony in the laws of various countries can deny promoters. farmers full access to markets. Regional blocs should push for Encouraging out-of-court settlements to resolve disputes uniform policies and laws, especially those that remove trade quickly and cheaply, with non-governmental organizations and barriers. industry representatives taking on the role of arbitrators. Smallholder farmers are scattered across farmlands keeping There is need for certi cation schemes that protect all transaction costs high. stakeholders. Contracts should cover all important aspects of CF and be Collective action and building of strong umbrella organisations easily understood by all stakeholders to promote equity. for farmers will increase their bargaining power. Such Development of all-inclusive contracts that cover important organisations need to be made more professional through aspects of CF and which are understood by all stakeholders training and other capacity-building programmes.

To address production risks, promoters need to invest in Continuous research is necessary to help identify and correct production and control how much is produced at the farm level. negative effects of contract farming.

REFERENCES The central role of contract farming in reviving Africa’s agriculture and trade has been endorsed by key players, including regional 1) African Union [2005]. Food Security Report, Addis Ababa, Ethiopia. institutions. These include the Africa Union, NEPAD, the Common 2) De Sousa E. [2005]. Contract Farming Issues and potentialities - Case studies in Market for East and Southern Africa (COMESA), the Economic Mozambique and Brazil, World Bank, Washington, USA. Community for Western African States (ECOWAS) and the Southern 3) FAO, [2005]. State of Food Insecurity in the World 2005: Eradicating World Africa Development Cooperation (SADC). These organizations were Hunger key to achieving the Millennium Development Goals. all represented at a workshop to discuss the future of contract farming in Africa that provided material for this policy brief. 4) Hazell P. [2006], Paper prepared for a workshop on Policy, Poverty and Agricultural Development in Sub-Saharan Africa, March 8-9, 2006, Ministry of NEPAD would like to thank Sida-RRD-Nairobi for the nancial and Foreign A airs, Stockholm, Sweden. technical support. NEPAD also recognizes the technical support 5) Levine A. B. [2005]. Strategies to Increase the Market Share in the World Market from , ICRAF, the Government of Uganda and ISNAR. In addition, for Major Contract Farm Products, TechnoServe, Nairobi, Kenya NEPAD acknowledges the institutions that presented thematic 6) Martin D. [2005]. Standards and Grades: The Case of South Africa, PPECB, Cape position papers: ISNAR, World Bank, FANRPAN, FAO, TechnoServe, Town, South Africa. and PPECB. 7) Mwenda I. [2005]. Analysis of Contract Farming in Zambia, South Africa, and Malawi, FANRPAN, Pretoria, South Africa For more information, contact For more information, contact 8) Minae S. [2005]. Implications of Globalization on Commodity Markets Under NEPAD Secretariat Agriculture Unit, P.O. Box 1234, Halfway House, NEPAD Secretariat Agriculture Unit, Contract Farming, FAO, Harare, Zimbabwe Midrand,P.O. Box South1234, Halfway Africa, Tel.:+27113133153 House, Midrand, South Africa, http://www.nepad.org 9) Mugerwa W. K. [2005]. Emerging role of farmer Groups in Contract Farming in Tel.:+27113133153 Uganda, IFPRI, Addis Ababa, Ethiopia. http://www.nepad.org 10) Ngomane T. and K. Banda [2005]. Gender Implications of Contract Farming in World Agroforestry Centre Africa. PO Box 30677-00100 Nairobi, Kenya 11) Ochieng C. [2005]. Importance of Contract Farming and the Prospects for Tel + 254 20 7224000; Contributing to Poverty Reduction in Africa, IFPRI, Addis Ababa, Ethiopia. http://www.worldagroforestry.org 12) UNECA [2004]. Economic Report on Africa 2004: Unlocking Africa’s trade potential.

4 Contract farming’s potential in linking smallholder farmers to markets